Eurosclerosis Defined

The European Predicament (washingtonpost.com)
If there’s ever been an argument in favor of entitlements reform, it can be summed up in one word: Europe. Their economy is so saddled with regulations and has such a large fiscal burden that they can’t grow, even in relatively prosperous times. Party hats come out if unemployment drops below 8%.

Without entitlements reform, that’s what the U.S. will look like in a couple of decades. Not quite as bad, but bad enough. That’s why it’s so important that part of Social Security be privatized — to promote capital accumulation rather than high taxes and unfunded liabilities. That’s why personal accounts in health care are so important — a functioning market is needed as well. Fiscal burden will determine our potential growth in the future and anything we can do to minimize it will help.

Let’s be clear. If Europe’s economy was healthy, it would grow about 4 percent annually for a few years and then settle down to a respectable 2.5 percent or 3 percent. The initial burst would absorb surplus unemployment (the jobless rate is near 9 percent). Once that happened, Europe would ride the gains of new technologies. Nothing like this is occurring. Since 2000, the economy of the “euro zone” (the 12 nations using the euro) has averaged growth of about 1 percent a year. That’s bad for Europe — and everyone else.

In the past year, American-European relations have fixated on Iraq. Europe’s loathing of the war distracted attention from its own failures. Its economic model could once be defended as a justifiable political choice. People could select their flavor of prosperity. America’s flavor — more competition and insecurity — wasn’t for everyone. Europe could pick less anxiety and more vacations. It could sacrifice some economic growth for a bigger welfare state (more jobless benefits, universal health care). This argument no longer works.

Why not? Well, the economy is so enfeebled by high taxes and restrictive regulations that it can’t pay for all the benefits. The gap between promise and performance must widen and, in the process, spawn disillusion and discord. One early example involves France’s and Germany’s violation of the Stability and Growth Pact, requiring member countries to hold their budget deficits to less than 3 percent of gross domestic product. In 2002 and 2003, France and Germany failed and, rather than face penalties, forced other countries to suspend the rules. Naturally, smaller countries that complied were furious.

Greater conflicts loom. In May the European Union will expand to 25 members by adding 10 countries with 74 million people (the largest: Poland, Hungary and the Czech Republic). The presumption is that shared prosperity will promote mutual good will. The danger is that shared stagnation will aggravate mutual ill will. A larger threat arises from aging populations and expensive retirement programs. Government spending in the European Union already averages 48 percent of GDP (the United States: 34 percent). By 2030 the older (65-plus) population is projected to rise 55 percent, while the working population (15 to 64) will shrink by 8 percent. Promised benefits can’t be paid without crushing taxes or implausible budget deficits.